1. What did Southport Minerals confront in 1964? Did the Firstburg investment opportunity fit well with Southport’s needs in 1970? Southport confronted a period of tightening supplies and rising sulfur prices which lead to a sharp increase in profitability for the company. Profit after tax had jumped from $12.8 million in 1963 to $15.3 million in 1964 increasing its EPS to 1.00 a share while still maintaining a dividend of .60 a share while actually lowering its dividend payout ratio. Southport was also highly liquid during this time, having $54 million in cash on hand and liquid securities and no debt in its capital structure.
Being in a highly liquid position Southport sought diversification to lessen its dependence on Sulfur which had accounted for 90% of sales in the mid 1960’s. Southport was looking for a sizable investment for its cash position that was attractive. After investigating Firstburg they found that the mountain contained 33 million tons of ore with an average copper content of 2.5%, which in geographical terms is relatively high content for ore. Copper prices have been increasing from 29.3 cents a pound in 1963 all the way to as high as 69.1 cents a pound in 1966 as rising world consumption outweighed ore production. This opportunity presented a perfect opportunity for Southport to diversify into copper ore mining and seek a positive return on its highly liquid cash position. The political climate in Indonesia had settle down by 1967 and suggested a safer outlook against expropriation.
2. Describe the financing plan that Southport was negotiating (answer the question in detail according to the info provided by the case). The first step Southport took was to form a new subsidiary called Southport Indonesia Inc. This means that SI is a separate entity than Southport, and they would not be responsible for its debt obligations. SI began to contract the output of the mine to Japanese and German smelters. 2/3’s of the mine output would be contracted to the Japanese smelters, and 1/3 to the German smelter. The Japanese deal would allow a consortium of smelters to invest $20 million in subordinated debt to SI at an interest rate of 7%. The principal would be amortized over 6 years and payable in chunks of 3.3 million. This debt was “junior debt” meaning they were last in line to receive repayments before senior debt obligations are claimed. Having several smelters contribute to the loan will lower the risk of the Japanese invested capital. This loan would be guaranteed by the Export-Import Bank of Japan. The German smelter had induced a German bank to lend SI $22 million of senior debt at 7% interest. This loan would be repayable between 1974 and 1982 in escalating installments and was guaranteed by the Federal Republic of Germany. Total foreign investment is $42 million.
A group of U.S. banks had agreed to give SI $18 million repayable between 1974 and 1976 with an interest rate a ½% over the prime rate. This was a senior loan and was guaranteed by the Export-Import bank of the U.S. They made this guarantee because SI agreed to purchase $18 million of U.S. manufactured equipment, a you scratch my back I’ll scratch yours kind of deal. Offering the biggest investment was a group of U.S. insurance companies which agreed to lend $40 million repayable between 1975 and 1982 at 9.25% interest. A guarantee was supplied by the Overseas Private Investment Corp., an agency of the U.S. Government, this guarantee would cost 1.75% per year, which would raise the interest rate of the loan to 11% all together. This guarantee was a result yet again of SI agree to purchase $40 million of U.S. manufactured equipment. The remaining $20 million would be provided by Southport minerals in the form of an equity investment. The overseas private Investment Corp. had guaranteed Southport’s investment against loss due to war, expropriation, and currency inconvertibility. To protect...